Hong Nam-ki, Deputy Prime Minister for Economy and Minister of Strategy and Finance (second from left), is delivering opening remarks at a briefing on the introduction plan of the Korean-style fiscal rules held at the Government Complex Sejong on the 5th.
[Asia Economy Reporter Kwangho Lee] The government has decided to introduce a "Korean-style fiscal rule" starting from the 2025 fiscal year, which aims to manage the national debt ratio relative to Gross Domestic Product (GDP) at 60% and the consolidated fiscal balance within -3%. However, if one indicator temporarily exceeds the standard, the rule will still be considered met if the other indicator remains below the standard. Additionally, the rule includes a clause exempting its application in cases of war, large-scale disasters, or global economic crises.
On the 5th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, announced the "Amendment to the National Finance Act" containing these fiscal rules at the Government Complex Sejong and stated that after gathering public opinions, the bill will be submitted to the National Assembly.
Deputy Prime Minister Hong explained, "Compared to other countries, our fiscal situation is relatively sound in terms of the absolute size and ratio of national debt, and there is capacity. However, special caution is needed regarding the speed at which debt and balance deteriorate during crisis recovery processes. This is the background and reason for introducing the Korean-style fiscal rule."
Regarding setting the national debt ratio standard at 60%, Hong said, "This takes into account the current national debt ratio, mid- to long-term fiscal conditions, and the increasing demand for welfare expenditure. Considering that national debt increased somewhat during the COVID-19 crisis and that ripple effects are inevitable for several years afterward, especially with the medium-term plan showing the national debt ratio in the late 50% range in 2024."
On setting the consolidated fiscal balance at -3%, he mentioned, "Since the consolidated fiscal balance is widely used internationally, we set the standard based on it. We also considered that during the COVID-19 crisis, the consolidated fiscal balance already exceeded -3% and reached -4%, as well as future fiscal conditions and balance forecasts."
He added, "If the fiscal rule limits are exceeded, it will be mandatory to prepare fiscal soundness measures. In other words, if the limits are exceeded, a multi-faceted fiscal soundness management plan including expenditure innovation, tax revenue measures, and balance improvement will be prepared to ensure early return within limits and enhance the effectiveness of securing fiscal soundness."
Regarding the timing of introducing the fiscal rule in the 2025 fiscal year with a three-year grace period, Hong explained, "During the first phase until 2024, the fiscal rule will not be applied, but efforts to comply with the intent and management of the fiscal rule will effectively be carried out."
He continued, "The second phase is when the fiscal rule will be fully applied, starting from the 2025 fiscal year, and the government will steadily prepare for this."
Deputy Prime Minister Hong expressed, "The government will do its utmost to fulfill fiscal responsibility and secure fiscal sustainability, aiming to catch 'two rabbits' in fiscal management."
He emphasized, "Fiscal soundness and sustainability are not solved solely by the fiscal rule formula. Continuous government efforts in fiscal efficiency and management must be carried out in parallel."
Hong concluded, "Fiscal policy is the last bastion of our economy and will always fulfill its role alongside the people and the national economy. At the same time, we will focus all efforts on solidly accumulating fiscal capacity to hand down a robust fiscal foundation to future generations."
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